The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge
MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT;GRANTING IN PART AND DENYING IN PART THE DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT
This matter comes before the court on the parties' cross-motions for summary judgment. In September 2008, the Department of Health and Human Services ("HHS") issued an administrative ruling that required the plaintiff, a hospital in Rockford, Illinois, to repay several million dollars to the Medicare program for the training of its medical residents. The plaintiff commenced this action challenging the ruling under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701 et seq., arguing that the defendant should be estopped from demanding reimbursement. For the following reasons, the court grants in part and denies in part the parties' respective motions, and remands the matter to the administrative agency for further proceedings regarding the plaintiff's alleged entitlement to relief under 42 C.F.R. § 412.86(g)(8).
1. Medicare Reimbursement of Medical Education Costs
Medicare provides health insurance to the elderly and disabled by entitling eligible beneficiaries to have payment made on their behalf for the care and services rendered by health care providers. See 42 U.S.C. §§ 1395 et seq. Providers, in turn, are reimbursed by insurance companies, known as "fiscal intermediaries," that have contracted with the DHS to aid in administering the Medicare program. See id. § 1395h. Fiscal intermediaries determine the amount of reimbursement due to providers under the Medicare Act and applicable regulations. See id.
Providers that train residents in approved residency programs may be reimbursed for the costs of "graduate medical education" ("GME") and "indirect medical education" ("IME"). See 42 U.S.C. § 1395ww. One variable used to calculate the reimbursable GME and IME costs allocable to a provider is the number of full-time equivalent ("FTE") residents in that provider's training program. See id. A high GME or IME FTE resident count yields a correspondingly high GME or IME payment for the provider. See id.
To receive reimbursement for these services rendered to Medicare beneficiaries, a provider must submit a yearly "cost report" to its fiscal intermediary, in which it demonstrates the costs incurred during the previous fiscal year and the portion of those costs allocable to Medicare. See 42 C.F.R. § 413.20. The fiscal intermediary may audit the cost report before determining the total amount of reimbursement to which the hospital is entitled, which is then memorialized in a Notice of Program Reimbursement ("NPR"). See id. § 405.1803. The fiscal intermediary may reopen and revise a cost report within three years after the date of the NPR.
In the Balanced Budget Act of 1997 ("BBA"), Congress capped the number of residents that a hospital may count for purposes of calculating the IME adjustment and GME payments.
42 U.S.C. §§ 139ww(d)(5)(B). More specifically, for cost reporting periods beginning on or after October 1, 1997, the BBA limited the number of GME FTEs and IME FTEs that a hospital could count for the purpose of calculating GME and IME payments to the FTEs in "the hospital's most recent cost reporting period ending on or before December 31, 1996" ("FTE resident cap"). Id.
As evidenced by the BBA's legislative history, Congress was concerned with how best to design and calculate the FTE resident cap. H.R. Conf. Rep. No. 105-217, at 821-22 (1997), as reprinted in 1997 U.S.C.C.A.N. 176, 441-42. Recognizing the complexity of the issues raised, Congress chose to delegate to the defendant the task of implementing rules to govern the FTE resident cap. Id. In delegating this rule-making authority, Congress noted that the defendant should "give special consideration to facilities that meet the needs of underserved rural areas." Id. Similarly, Congress instructed the defendant to apply the "proper flexibility to respond to [the] changing needs" of training programs; such flexibility, however, would necessarily be "limited by the conference agreement that the aggregate number of FTE residents should not increase over current levels." Id.
The defendant promulgated regulations implementing the FTE resident cap in 1997. See 42 C.F.R. §§ 413.86(g)(4), 412.105(f)(1)(iv) (1997) ("1997 Final Rule"). The defendant subsequently revised the regulations concerning the GME and IME resident caps in 1998, 1999 and 2001. See 42 C.F.R. §§ 413.86, 412.105 (1998) ("1998 Final Rule"); 42 C.F.R. §§ 413.86(g)(8) (1999) ("the 1999 Final Rule"); 42 C.F.R. §§ 413.86(g)(8)(iii), 412.105(f)(1)(ix) (2001) ("the 2001 Final Rule"). Through these regulations, the defendant carved out exceptions to the FTE resident cap, two of which are relevant here: (1) the Affiliated Group Exception and (2) the Temporary Cap Increase Exception.
3. Affiliated Group Exception
In 1997, the defendant issued a regulation stating that "[h]ospitals that are part of the same affiliated group may elect to apply the limit on an aggregate basis" ("the Affiliated Group Exception"). 42 C.F.R § 413.86(g)(4) (1997) ("1997 Final Rule"). Initially, the defendant narrowly defined an "affiliated group" as "two or more hospitals located in the same geographic wage area . . . in which individual residents work at each of the hospitals seeking to be treated as an affiliated group during the course of the approved program." Id. The regulation did not address whether a written agreement was necessary to demonstrate the existence of an affiliated group. See generally id.
In 1998, the defendant issued revised regulations which provided further guidance regarding the requirements to qualify under the Affiliated Group Exception. See 42 C.F.R. § 413.86(b)(2). More specifically, the 1998 Final Rule expanded the definition of affiliated group to include providers in contiguous areas that were under common ownership. Id. Additionally, the preamble to the 1998 Final Rule clarified the documentation needed to demonstrate the existence of an affiliated group for cap sharing purposes, stating that
[h]ospitals that qualify to be members of the same affiliated group for the current residency training year and elect an aggregate cap must provide an agreement to the fiscal intermediary and the HCFA specifying the planned changes to individual hospital count under an aggregate FTE cap by July 1 for . . . the residency training year. Each agreement must be for a minimum of one year and may specify the adjustment to each respective hospital cap under an aggregate cap in the event the agreement terminates, [or] dissolves. . . . [Further] [e]ach agreement must ...